Wall Street cratered on a strong jobs report. I don’t mean to sound alarmist, but when the Dow drops this much in one day, it is significant even if it is only a 2.56% decline, which marked the biggest percentage decline since Brexit. Still, on a point basis, Black Monday, October 19, 1987 was a 507-point decline in the Dow. Also, this was the biggest single day drop for the Dow since October 2008, when the Troubled Asset Relief Program didn’t pass.

Markets moved lower on the jobs reports and then cratered with the release of the “memo” from House Intel Head Devin Nunes. The memo does not exonerate Trump, and if he tries to use it as justification to fire more people from the DOJ or FBI, such a move will likely backfire badly. Now stocks may continue with the “buy the dip” mentality on Monday, or not.

The S&P 500 and Dow saw their worst weeks since early January 2016 while Nasdaq had its worst week since early Feb 2016.

The US economy added 200,000 new jobs in January. The unemployment rate was unchanged at 4.1%, a 17-year low. Wages ticked higher by 0.3%. The increase in hiring beat estimates of around 180,000. November was revised lower from 252,000 jobs to 216,000, and December was revised higher from 148,000 to 160,000 for a combined loss of 24,000 jobs in the revisions. The past 3 months have averaged 192,000 jobs per month. In January, the year-over-year employment change was 2.114 million jobs. Good, but trending slightly lower.

The U-6 unemployment rate is 8.2%, up from 8.1%. U-6 measures unemployed plus people working part-time who would prefer to be working full-time (for example: this includes people who have had their hours cut). The number of part-time workers who would prefer full-time jobs has fallen nearly 15 percent in the past year. And temporary hiring has been flat for two months.

Average hourly wages jumped 9 cents, or 0.3%, to $26.74. That pushed the yearly increase to 2.9% from 2.6%, marking the highest level since June 2009. Until very recently worker pay had risen slowly, trailing well below the 3% to 4% gains typically seen at the peak of an economic expansion. A couple of caveats, though: The time workers put on the job last month fell 0.2 hours to 34.3 hours, likely contributing to the uptick in pay. Many of the people who worked less also get paid less. Fewer hours worked might also be a sign that demand for labor might not be as strong as the headline job-growth figures suggest.

At the same time, 18 states raised minimum wages in January and that likely added to the increase in pay. Past increases in the minimum wage, however, have usually not had a huge impact. The biggest increases in pay last month accrued to white-collar business professionals, media and entertainment, health-care workers and those employed by utilities. Hourly pay rose from 0.4% to 0.6% in those professions — already among the most well-paid in the U.S. Employees at retailers, restaurants and hotels, who generally earn much less, saw smaller gains despite an increase in the minimum wage in 18 states. Those are the fields with the biggest numbers of workers receiving the minimum wage. Also, cold weather could have temporarily boosted pay last month. Frontline construction workers might have stayed home during the cold spell, cutting into their pay, while salaried supervisors would have been paid either way. Don’t read too much into a single month of data, which is preliminary and will be revised at least twice. Several times in recent years, wage growth has appeared to pick up, only to fall back to earth in subsequent months. And other measures of wage growth haven’t yet shown the same acceleration.

Are we at full employment? First, full employment is an amorphous term, but beyond that distinction – no, we’re not there yet. The Labor Force Participation Rate was unchanged in January at 62.7%. This is the percentage of the working age population in the labor force. The black unemployment rate, which has been a recent point of emphasis for the administration and fell to a record-low 6.8% in December, increased in January, to 7.7%.The unemployment rate for white Americans fell to 3.5 percent.

The biggest worry among businesses is a shortage of skilled workers. Basic supply and demand would indicate that as labor supply tightens, and if demand remains strong, wages should rise. We just haven’t seen it yet; we may be seeing it now but it is still early. There are still many good workers on the sidelines. Employers know that, and their wage offerings have been less attractive because of it. But as the labor market gets tighter and tighter, employers will need to pick up the pace of their wage offerings in order to attract new workers and keep the workers they have. Also, employers will have to train workers, including candidates that might be easily overlooked. For a long time, employers were very picky, unwilling to offer a job to any but the highest qualified candidate; now, they may be more willing to hire someone, and train them. Of course, during the training process, wages generally remain suppressed.

The big worry for the Federal Reserve is that an ultra-tight labor market will stoke inflation and force the central bank to raise interest rates more aggressively, an outcome that could hurt U.S. growth. So far there’s little evidence to suggest a big upswing in inflation but there are some early indicators of higher prices, including higher oil prices. The question for the Fed now is whether the plan for gradual tightening in interest rates will be enough if wage gains accelerate further. There is a feeling among some Fed policymakers that their greatest risk is being behind the inflation curve. Dallas Fed President Robert Kaplan took a hawkish stance, raising the prospect of more than 3 rate hikes in 2018; Minneapolis Fed President Neel Kashkari said, “If wage growth continues, that could have an effect on the path of interest rates.” Kashkari opposed all three rate hikes last year, saying he didn’t see enough evidence inflation was climbing toward the Fed’s 2% target. San Francisco Fed President John Williams says the central bank should stick to its plan to raise interest rates at a gradual pace.

This is Janet Yellen’s last day as Federal Reserve chair. Raising interest rates is a delicate balancing act, and Yellen proved masterful at the task. Until recently. The timing of the tax cuts is such that they’re throwing a lot of fiscal stimulus—hundreds of billions in new, deficit spending—at an economy that’s already, on its own, closing in on full employment. Based on the already strong, negative trend in the unemployment rate, and the added stimulus, the unemployment rate could be in the mid-3s by the end of this year. And while we all welcome low unemployment, or the idea of full employment, it isn’t matching up with fiscal policy. Aggressive deficit spending at low unemployment is unusual.

Looking at data back to the late 1940s, the average deficit-to-GDP ratio when unemployment was below 5 percent was close to zero. In other words, the country doesn’t run much or any deficit when we have full employment. That makes sense, people are working and contributing taxes from their labors, and there is less need for a safety net. Since 1980, that same calculation yields an average deficit-to-GDP ratio of 0.5 percent. The jobless rate this year may average less than 4 percent while the deficit-to-GDP ratio could be about the same, and closer to 5 percent next year. So, pretty unusual.

So, what happens when you add fiscal stimulus to deficit spending while the labor markets are near full employment? I know that sounds a bit complicated, but it really is a simple question. The answer is inflation. No, we’re not there yet but the basic concept is like throwing gasoline on the campfire. A good principle of fiscal policy is that when you hit full employment (we’re not there yet, but we’re close), your revenue take should be moving closer, not further away, from your spending. One reason that’s important is that there’s a recession out there somewhere, and you want the “fiscal space” to push back on it, which is a fancy way of saying Congress is more likely to administer discretionary fiscal policy in a recession when you enter it with a 40 percent debt-to-GDP ratio than an 80 percent ratio. This fiscal rationale is particularly important because there may well be too little “monetary space” when we hit the next downturn, meaning the interest rate controlled by the Federal Reserve might not be high enough to provide room for much monetary stimulus. And so that means that the Federal Reserve is right now looking at Washington DC, and thinking “what a bunch of idiots”, and the Fed policymakers are probably thinking that it is incumbent on them to be properly prepared for the next downturn or black swan event, and that means they would really like to have some flexibility with interest rates. And that is why you saw the yield on the 10-year Treasury note pop to 2.85% and stocks cratered.